PFFV - PFFV: An Interesting Take On Preferreds

2023-12-23 20:41:50 ET

Summary

• Global X Variable Rate Preferred ETF is an ETF that focuses on variable rate preferred securities, offering unique benefits to income-oriented investors.
• Variable rate preferreds have adjustable coupon payments, providing potential for varying returns.
• PFFV has a heavy emphasis on the financial sector but offers a lower expense ratio compared to other similar ETFs.

Investing in equities and bonds is a common strategy for many investors. However, there's a third category of securities that combines characteristics of both equities and bonds - Preferred Stocks. And there are some good funds that focus on this part of the marketplace. The Global X Variable Rate Preferred ETF ( PFFV ) is one of them.

PFFV is an exchange-traded fund that provides exposure to a diverse collection of variable rate preferred securities. These hybrid securities share characteristics of both equity and fixed income instruments, offering unique benefits to income-oriented investors. PFFV was launched on June 24th, 2020, and is listed on the New York Stock Exchange. The ETF aims to replicate the performance of the ICE U.S. Variable Rate Preferred Securities Index.

Understanding Variable Rate Preferreds

Preferred stocks are a diverse category, including both fixed rate and variable rate preferreds as subtypes. Variable rate preferreds are a distinctive segment of this market, characterized by their adjustable coupon payments over time, which adds a layer of intrigue for investors.

While fixed rate preferreds provide consistent coupon payments throughout their existence, their variable rate counterparts modify coupon amounts in response to a benchmark interest rate, introducing a potential for varying returns.

Among variable rate preferreds, there are two main structures for coupon payments: floating rate and fixed-to-float. Floating rate preferreds see their coupon rates reset at regular intervals, such as quarterly or biannually, keeping pace with market interest rates. On the contrary, fixed-to-float preferreds begin with a predetermined coupon rate for an initial period, often ten years, before converting to a floating rate system where the coupon rate is adjusted at specified intervals.

Breakdown of PFFV's Holdings

The fund holds 57 securities, with a heavy emphasis on the financial sector. The top individual positions within PFFV include well-known Financials such as:

1. Morgan Stanley (MS) : This multinational investment bank and financial services company is the fund's largest position.
2. Goldman Sachs (GS) : Another leading global investment banking, securities, and investment management firm.
3. Citicorp (C) : The consumer division of financial services multinational Citigroup.
4. Bank of America (BAC) : One of the largest banking institutions in the United States.

Sector Composition and Weightings

PFFV is heavily tilted towards the financial sector, which represents over 88% of the ETF's portfolio. This is because financial companies are significant issuers of preferred securities as they can count these assets as part of their regulatory capital. Energy is a distant second at around 8%, and Industrials are at 2.5%.

Peer Comparison

When compared to other ETFs in the variable rate preferred space, such as the Invesco Variable Rate Preferred ETF ( VRP ), PFFV stands out for its lower expense ratio of just 0.25%, compared to VRP's expense ratio of 0.5%. This difference can offer significant savings for investors over the long term.

Pros and Cons of Investing in PFFV

Pros:

1. High Yield Potential : PFFV offers a high yield, making it an attractive option for income-oriented investors.
2. Lower Interest Rate Risk : Due to the variable rate nature of its holdings, PFFV has a lower interest rate risk compared to fixed-rate preferreds.
3. Diversification : Investing in preferred stocks can provide diversification benefits to an investment portfolio.

Cons:

1. Sector Concentration : With a heavy weighting in the financial sector, PFFV carries sector-specific risks.
2. Credit Risk : Preferred stocks fall lower in a company's capital structure compared to bonds, exposing investors to higher credit risk.

Conclusion: To Invest or Not?

If you're an income-oriented investor looking for a high yield potential and lower interest rate risk, PFFV can be a compelling option. However, keep in mind the sector concentration and credit risk associated with this ETF. I think it's a good fund for those looking for a hybrid of stocks and bonds with income.

For further details see: